15 April
Dear John List,
Firstly, congratulations on your new role as Chief Economist at Walmart. It’ll be interesting to see the experiments and initiatives that your team gets up to over the next few years. (I’ve also picked up a copy of your book, The Voltage Effect, and look forward to reading it soon.)
I assume you’ve read Sam Walton’s 1992 autobiography, Sam Walton: My Story.
I’m penning this letter to you because Walton outlined an interesting idea that any Chief Economist of Walmart, I think, should have an opinion on.
If you recall, Walton said the following:
“I'm going to confess to a really radical thought I've been having lately. I probably won't do anything about it, but the folks who come after me are eventually going to have to face up to this question. Even by thinking small, can a $100 billion retailer really function as efficiently and productively as it should? Or would maybe five $20 billion companies work better?” (Sam Walton, 1992)
Now, Walmart is many times bigger today than at the time of Walton’s writing. And the logistics, expenses, and disruption of such a strategic pivot would be astronomical, no doubt. But I think you’d agree that Walton’s “radical thought” is intriguing nonetheless.
One issue with dividing into many smaller companies, for example, is the trade off between scale economies and “thinking small”. Walton believed deeply in being on the floor and close to the customer. And customers will differ store-by-store, town-by-town. So if you want to serve them well you need to know them well.
Is Walmart’s culture, decision-chains, and information systems so effective that this is a non-issue given its gargantuan size? Might you raise productivity and merchandising by having fewer layers between your customers and associates and final decision-making? Will this be enough to offset the losses in scale efficiencies in distribution and elsewhere? I’m not so sure.
The effect on competition, pricing, and innovation is also interesting. I’m sure you are familiar with the “inertia of success”, in which dominant, unchallenged enterprises grow lazy and unrefined over time. Walton’s proposal would remove the safety-net and intensify competition. Survival, they say, is the best motivator.
Under Walton's suggestion, retailers everywhere might have to face-up with newfound competition. Raising competitive intensity by increasing the number of smaller players may spur even lower prices, better merchandising, leaner operations, and whatnot.
All of this should be good for the customer, I believe (unless the benefits of competition and local management does not offset the losses in benefits to scale). But it does sound mightily expensive for every retailer involved.
This seems true, at least in the short run. But in the very long-run, Walton’s experiment might actually improve Walmart’s longevity. Such a disruption forces learning and adaptation upon every retailer. You either sink or swim. The weaker retailers fade away as the successful players retake market share — a Darwinian process to build an even fitter Walmart.
In some ways, Walton’s “radical thought” is to artificially create the conditions that gave rise to Walmart in the first place. By making discounting work in the 70s in small rural towns, Walton’s operation became so efficient that direct competition with the lumbering city giants in the later years felt like a punch to their teeth.
Now, I know Walmart is unlikely to take this idea seriously. Spinoffs do happen from time to time, but I am not aware of any company in history that has willingly divided itself in such an extreme manner. While I’ve never worked at Walmart, I'm willing to bet there’s enough bureaucratic build-up to find such an idea distasteful.
But I am curious, John, if you have time to read this, what is your take on this? I’ve simply been thinking aloud. I’m sure you will have a more meaningful view on the matter. You did write an entire book on scaling after all.
Warm regards,
Tobias
Tobias Lim
Tobias Lim